10/7/16, 3:04 PMMcDonald’s Knows It’s Losing the Burger Battle—Can It Come Back? - WSJ

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The Big Mac, wrote a top McDonald’s franchisee in a memo to fellow operators in July,“has gotten less relevant.” This is the problem facing the world’s largest hamburgermaker—its burgers aren’t good enough.

Just one in five millennials, the fast-food industry’s core customer, has tried the flagshipproduct, the memo said. The number of hamburgers sold at McDonald’s U.S. restaurantshas been flat for the past few years, and was growing only at a 1% to 2% annual ratebefore that, according to former high-ranking McDonald’s executives.

New, “better burger” chains are pulling in customers with gourmet, made-to-orderburgers and quick, casual service. Serving that kind of product is at odds withMcDonald’s strategy of six decades, in which speed and low cost are pillars of sales.

“We have to nail it,” McDonald’s USA President Mike Andres said in a recent interview.“How do we deliver the best burger at the speed of McDonald’s and, ultimately, at thevalue you’d expect from McDonald’s? That’s what we’re working towards.”

A “sensory” panel is helping McDonald’s refocus on flavor, and the company is testingusing fresh instead of frozen beef, different cooking techniques and an ordering systemfor made-to-order, customized burgers. Steve Easterbrook, who became chief executivelast year, said the company is trying new things and rethinking “legacy beliefs.”

The challenges are clear. McDonald’s, the quintessential fast-food chain, gets nearly 70%of its U.S. business through the drive-through. Burgers are usually made in advance andheld in warming cabinets so they are ready when customers pull up. McDonald’s said itsgoal for delivery time, from when the order is placed to when it is delivered to thecustomer, is a mere 90 seconds.

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http://www.wsj.com/articles/mcdonalds-knows-its-losing-the-burger-battlecan-it-come-back-1475769684

BUSINESS

McDonald’s Knows It’s Losing theBurger Battle—Can It Come Back?‘Better burger’ chains are pulling in customers with gourmet, made-to-order hamburgers, atactic McDonald’s is struggling to mimic

A McDonald’s worker makes one of the new ‘Crafted’ items being tested in Downers Grove, Ill. Diners can customizeburgers with options including pico de gallo and guacamole. PHOTO: TAYLOR GLASCOCK FOR THE WALL STREET JOURNAL

Updated Oct. 6, 2016 8:30 p.m. ETBy JULIE JARGON

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Even though McDonald’s has broadened its menu, burgers still account for roughly 20%of the chain’s total sales of $8.6 billion in the U.S. last year, the former executives said.

Attempts in recent years to sell burgers with higher-quality ingredients—which result inhigher prices—haven’t been successful.

The mid-1990s Arch Deluxe,with a potato-flour bun andmayonnaise-mustard sauce,didn’t fly with a $2.49 pricetag, then 32 cents more than aBig Mac, and was phased outin 1998. In 2009, customersfound $4 to $5 for a line ofAngus beef burgers tooexpensive. Last year,McDonald’s tried again tointroduce a more-premiumburger made from sirloin, achoicer cut of beef, butcustomers weren’t willing topay $5 for that, either.

Executives and consumers feltburger quality had slipped.McDonald’s burgers came inlast in a Consumer Reportstaste survey of 21 hamburgerchains in 2014. “The worldisn’t waiting for anotherburger from McDonald’s,” aformer senior McDonald’sexecutive said. “It’s waiting fora better burger fromMcDonald’s.”

In the quest for speed, the company had cut corners in different ways each yearbeginning in the 1990s that affected quality, according to Larry Light, former marketingchief for McDonald’s. One year the chain stopped toasting the buns, leaving them soggyand chewy, Mr. Light said. Another year it began microwaving burgers, and another itextended the amount of time they could be held in warming cabinets.

“The cumulative impact was very negative,” he said. “There was continuousdegradation.” McDonald’s started trying to reverse the changes to improve quality in2003, he said.

In the past, low-cost burgers have had a big impact on McDonald’s revenue. The doublecheeseburger, added to the chain’s Dollar Menu in early 2003, alone accounted for about4% of the company’s U.S. sales, according to a former executive. But the menu didn’tboost profits, and the company moved to higher-priced value menus starting in 2013.

The new all-day breakfast foods brought in customers, but sales have slowed.McDonald’s in July reported U.S. same-store sales growth of 1.8%, compared with the

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3.2% growth analysts expected. It doesn’t break out burger sales. McDonald’s shareshave risen 11% in the past year but are off 14% from their 52-week high of $131.96 in May.

Fast-casual chains, which focus on fresher, higher quality ingredients, such as PaneraBread Co., have grown at a faster rate than the fast-food industry. In 2015, traffic at fast-casual chains grew 9%, while visits to fast-food chains were flat, although fast-casualchains have seen a dip this year due in part to quality problems at Chipotle Mexican GrillInc.

Better-burger chains, including Five Guys Holdings LLC, Smashburger Master LLC andShake Shack Inc., are growing faster than McDonald’s, especially among millennials,who have overtaken baby boomers as the country’s largest demographic group. Thepercentage of millennials who visited the much smaller Smashburger more than once amonth, for example, grew by 11 percentage points between the end of 2013 and thesecond quarter of this year, while those who visited McDonald’s grew by 6.5 percentagepoints, according to Technomic Inc., which studies the food industry.

McDonald’s two biggest competitors have taken a different approach. RestaurantBrands International Inc.’s Burger King, known for its flame-grilled Whoppers, oncestrayed from its core menu by offering fruit smoothies, sandwich wraps and salads, butit has since refocused on inexpensive burgers and fries, aiming to capture the low-end ofthe market. Wendy’s Co., which uses fresh beef, has managed to play in an area betweenfast food and the high-cost better-burger segment with slightly more expensive burgers,such as its popular pretzel bacon cheeseburger.

At McDonald’s, a panel of sensory experts consisting of chefs, suppliers and McDonald’sstaff over the past year for the first time studied every burger on the market, rating themagainst McDonald’s core burgers on attributes such as caramelization, tenderness andjuiciness.

McDonald’s USA President Mike Andres, shown in August, said the company is focused on producing a better burger at thespeed and price expected from McDonald’s. PHOTO: ALEX GARCIA/ASSOCIATED PRESS

Customers ordered lunch Monday using self-serve kiosks being tested at McDonald’s in Downers Grove, Ill. PHOTO:TAYLOR GLASCOCK FOR THE WALL STREET JOURNAL

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Mr. Andres said McDonald’s is testing different grinds of beef, various buns and toppingsand is tinkering with cook times and temperatures.

Other recent changes include switching from cooking beef patties on Teflon sheets,which are easier to clean, to searing them on an iron grill so they come out hotter. Bunsare toasted five seconds longer, resulting in burgers that are 15 degrees warmer.

“We had reduced the toast time in the past to meet expectations at the drive-through,”Mr. Andres explained. “We want to make things as easy as possible, but taste trumpseverything.”

The moves are part of abroader effort in which Mr.Easterbrook, the CEO, hasbeen pushing executives toreview every menu item forpossible improvement. Thecompany has returned tousing butter instead ofmargarine in the EggMcMuffin and removedartificial ingredients fromChicken McNuggets and otherproducts. “We’re trying things,

and that’s a very positive thing,” said Mr. Easterbrook in an interview.

Two new Big Macs are set to debut next year: a larger one called the Grand Mac and asmaller one called the Mac Jr.

McDonald’s latest attempt to create a better burger failed. A sirloin burger, topped withsauteed mushrooms, white cheddar cheese and peppercorn sauce didn’t meet salesexpectations and wasn’t extended beyond its limited-time offering window last year.The company said the burger improved customers’ perceptions of its beef quality andthat people liked the taste. It declined to comment on whether the $5 price tag was afactor.

McDonald’s should focus on improving its staple burgers, said Mr. Light, the formermarketing chief. “Every time they go outside of their space, they fail.”

The chain is testing customizable burger menus in some markets, allowing diners toselect the type of meat, bun and toppings they want from a self-order kiosk and then sitdown and wait for an employee to deliver the food to their table. Options includeguacamole, grilled onion or bacon.

To speed up service inside and make a custom burger work at the drive-through,McDonald’s reduced the number of ingredient choices to six from 14 and decided to searthe meat in a clamshell grill, which is faster than turning it to cook one side at a time.

Franchisees have complained it doesn’t make sense to focus on table service when somuch of the business comes at the drive-through, and guests have complained that ittakes too long.

“Customers loved the taste but said, ‘We don’t have 10 minutes,’ ” said Alex Williams, theexecutive in charge of the initiative, which is still undergoing testing.

The company is in the early stages of testing a mobile order-ahead app that could speedup service, said McDonald’s Chief Digital Officer Atif Rafiq.

In what would be a major shift, a Dallas franchisee this spring persuaded the company tolet him make Quarter Pounders with fresh beef, Mr. Easterbrook said. The company has

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used frozen beef since the1970s. Workers at 54McDonald’s restaurants inDallas now salt and pepperfresh beef, which arrivesalready formed into patties,and sear it on the grill.

The idea of using fresh beef inall the chain’s U.S. restaurantshad been broached in 2011,and a feasibility plan from abeef supplier was prepared,one of the former McDonald’sexecutives said. Top leaders atthe time said fresh beef wasn’ta priority and the focus was onadding chicken to the menu,he said.

Switching to fresh beef couldslow down customer serviceand add complexity to asystem designed to storefrozen food, according to aNomura Securities analystsurvey in July of 27 U.S.franchisees who own 199McDonald’s restaurants.There are also concerns aboutcontamination.

“Fresh beef in and of itself isnot necessarily the big idea,”said Mr. Andres, who isplanning to retire at the end ofthe year. “The big idea is thatwe want to be able to give you

your hamburger hot off the grill.”

Write to Julie Jargon at julie.jargon@wsj.com

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